Civil Litigation in Hong Kong: Tracing, Freezing and Recovering Cryptocurrency in Fraud Case ?
As legal practitioners practising in the area of fraud assets recovery in Hong Kong, we find that in recent days it often happens that the victims of the frauds were decepted to transfer cryptocurrency assets to accounts designted by the scammers. The invovement of cryptocurrency assets instead of the usual “fiat currency” makes the tracing, freezing and recovery more challenging.
Nature of Cryptocurrency Assets as Property
injunctive relief in Hong Kong, particularly if they are able to trace the transaction to a cryptocurrency exchange in Hong Kong. For example, in Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718 and [2022] HKCU 1899, the Hong Kong court granted a Mareva injunction and a proprietary injunction over the assets of a cryptocurrency trader, and also granted discovery orders against the defendant to assist the plaintiff.
In Yan Yu Ying v. Leung Wing Hei [2021] HKCFI 3160, the Hong Kong court granted an interim proprietary injunction over 999.9900261 bitcoins to preserve the subject matter of the dispute, pending substantive determination. The Court granted the injunctions without discussing any specific issue or technical difficulties arising from the nature of cryptocurrencies.
In Re Gatecoin Limited [2023] HKCFI 914,Linda Chan J specifically recognizes that cryptocurrency is property which can be taken into custody by liquidators or provisional liquidators.
In AA v Unknown Persons [2019] EWHC 3556, it is decided that the crypto assets are chosen in action for proprietary purposes under common law. Also Fetch.ai Limited & Anor v. Persons Unknown & Ors.[2021] EWHC 2254 (Comm) confirmed the same.
Identify the Exchange Platform where the Recipient’s crypto assets account is maintained
In cryptocurrency fraud cases, what the victim knows is a series of recipient wallet numbers provided by the scammer. The identity and location of the recipient is unknown. The platform that the recipient used to receive the crypto assets is unknown. In order to freeze the assets on a proprietary basis and know the recipient’s identity information, it is necessary first to identify the Exchange Platform where the Recipient’s Wallet is maintained.
Chainalysis Inc, is a blockchain investigations firm operating in New York, Washington DC, Copenhagen, and London to track such exchange platforms. (AA v Unknown Persons [2019] EWHC 3556, Liam David Robertson v Persons Unknown , CL-2019-000444, unreported, 15th July 2019 )
Proprietary Injunction and ancillary disclosure
In cryptocurrency fraud cases, what the victim knows is a series of recipient wallet numbers provided by the scammer. The identity and location of the recipient is unknown. The platform that the recipient used to receive the crypto assets is unknown. The victim may or may not be a HK resident. How to ascertain whether Hong Kong has jurisdiction? As jurisdiction matters are highly related to the cause of action and the gateway for service out, it should be discussed under these topics.
In AA v Unknown Persons [2019] EWHC 3556, it is found that the service out on the Exchange platforms domiciled in BVI is difficult based on the Bankers Trust/Norwich Pharmacal aspect of the application. Instead, relying on the cause of action of the restitution and/or constructive trustee against all four defendants (1st and 2nd as recipient account holders, 3rd and 4th as Exchange platform), a proprietary injunction was ordered, and further ancillary disclosure is ordered and service out can be made through the gateway where (1) a claim is made for an injunction order and the defendants be prevented from doing an act within the jurisdiction;
(2) a claim is made against a person upon whom the claim form has been served or will be served otherwise in reliance on this paragraph, and (a) there is between the claimant and the defendant a real issue which it is reasonable for the court to try and (b) the claimant wishes to serve the claim form on another person who is a necessary or proper party to that claim;
(3) a claim is made for an interim remedy under section 25.1 of the Civil Jurisdiction and Judgments Act 1982 ; (4), a claim is made in tort where damage was sustained or will be sustained within the jurisdiction, or damage which has been or will be sustained that results from an act committed or likely to have been committed within the jurisdiction.
Substituted Service
In AA v Unknown Persons [2019] EWHC 3556, alternative service order was made to the account holders that the claimant had permission to serve the order and all other documents required to be served in relation to the enforcement of the order or the proposed proceedings on the first and second defendants ()by email, by any address provided by the second and third defendants relating to the Bitcoin account identified at annex A, and by delivering or leaving it any physical address provided by the second and third defendants that relate to the Bitcoin account identified at annex A, and it seems to me that it would be also appropriate to authorise service of the claim form by the alternative method of filing it at court, for essentially the same reasons as were granted by Warby J in the LJY case. To Exchange platforms: by email.
Mariva Freezing Injunction
In Vorotyntseva v Money-4 Limited, trading as Nebeus.com [2018] EWHC 2598 (Ch), freezing order was made not only against the defendant company having received and held the cryptocurrency assets, but also against the shareholders and directors who had been involved in the management.
Norwich Pharmacy Order and Banker’s Trust Order
In Fetch.ai Limited & Anor v. Persons Unknown & Ors.[2021] EWHC 2254 (Comm), while Norwich Pharmacy Order on a third party out of the jurisdiction is not allowed, Banker’s trust order is allowed.
In Ion Science Ltd v Persons Unknown (Unreported, CL-2020-000840, 21 December 2020), on an ex parte application, the English High Court granted permission to serve a free-standing Bankers Trust Order out of jurisdiction against a crypto-exchange. The question whether this can be done was once doubted in AA v Unknown Persons, supra, but the question was answered affirmatively in Ion Science Ltd.
Which law governed the jurisdiction of cryptocurrency?
Fetch.ai Limited & Anor v. Persons Unknown & Ors.[2021] EWHC 2254 (Comm)： There were no decided cases on this point. In the end, the choice of law fell upon the fact that Fetch.ai Limited (i.e., the victim) was incorporated in the UK.
Litigation against Person Unknown
It has long been the practice of UK courts to allow claims to be brought against categories of “Persons Unknown” as victims will rarely know the exact identity of the perpetrators： Bloomsbury Publishing Group PLC & Anor v. News Group Newspapers Ltd & Ors [2003] EWHC 1205 (Ch)
Hong Kong has also readily adopted the same practice to enable orders against anonymous persons interfering with a victim’s rights： Billion Star Development Limited v. Wong Tak Cheung [2012] 2 HKLRD 85
In Jones v Persons Unknown [2022] EWHC 2543 (Comm), an uncontested summary judgment application, the Court made a delivery up order against a crypto-exchange controlling the wallet into which defrauded bitcoins were paid, notwithstanding that the identity of the fraudsters remained unknown.
Post-judgment: order the transfer of funds the subject of a worldwide freezing order into England and Wales
The fact that the location of cryptocurrency is unidentified and that crypto-exchange platforms are often controlled by offshore entitles, do not deter the Courts from tailor-making an injunction to give victims of a crypto-fraud legal reliefs. In Joseph Keen Shing Law v Persons Unknown (Unreported, LM-2022-000049, 26 January 2023) Mr Justice Pelling of the English High Court varied a previously granted freezing order (i.e. a mareva injunction) and ordered the relevant crypto-exchange entity to: (1) convert the cryptocurrency which represented the cryptocurrency defrauded from the plaintiff into fiat currency; (2) pay that fiat currency to the Court Funds Office of the English Court. This case reiterates the principle that an injunction order operates in personam against the crypto-exchange, regardless where the cryptocurrency concerned are situated, or from where the crypto-exchange operated. When the need to protect property rights over cryptocurrency arise, the Courts are not slow to tailor-make an order to do practical justice.
(Bob Yan, principal solicitor of Yan Lawyers, solicitors. Email: [email protected], WhatsApp: +852 51039249)